Continental European long-term gas contracts

October 20, 2009 | 00:00

Continental European long-term gas contracts: is a transition away from oil product-linked pricing inevitable and imminent?

The author argues that a transition away from formal contractual oil product price linkage in Continental European long term gas contracts is inevitable and imminent. The conclusion of inevitability arises from the diminishing rationale of the price linkage with oil as the markets into which oil products and gas are sold have diverged substantially.

The conclusion that formal contractual decoupling is imminent in 2009-10 arises from market conditions in which long term contract prices have become untenable in the face of a surplus of gas supply which has already seen short term prices at market hubs at around half of oil-linked levels for several months. These supply surplus conditions seem likely to remain for at least 1-2 years (and arguably longer). However contractual delinking does not mean that oil prices will become irrelevant to gas prices and although the current supply surplus may last for at least 2 years it is not a permanent phenomenon.

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